28 September 2012

Breach of confidence – Patent infringement –Jurisdiction – whether New Zealand court has jurisdiction to decide infringement, in the US, of a US patent, where ownership and validity are not at issue

In what might be described as a ‘courageous’ ruling, a judge of the New Zealand High Court in Auckland has found, in Stewart v Franmara Inc no.2[2012] NZHC 1771, that New Zealand courts have jurisdiction to decide on infringement of a US patent, committed in the US by a US-based company, at least in cases where there is no dispute over ownership or validity of the patent rights.

Having reached this conclusion, the judge (Justice Toogood) further found that, in this particular case, infringement of the US patent in question had occurred, and that the New Zealand-based patentee was entitled to a remedy in the form of damages. However, the judge declined to apply a multiplication of damages for wilful infringement, which would be permitted under 35 USC § 284 if the case had been brought in a US federal court.

In reaching this decision, the New Zealand court has shown a remarkable willingness to reach outside the national jurisdiction, and to decide a question arising under a foreign patent law which is, frankly, very different from the law in New Zealand. It was no doubt of assistance to the local plaintiff that the foreign defendant did not appear. Had it done so, it might have pointed out some of the relevant differences, such as the US approach to claim construction, the operation of the US doctrine of equivalents, and the need to refer to the US patent prosecution history to determine questions of construction and possible estoppel.

This particular ruling could be an anomaly. Nonetheless, it may provide some encouragement for other New Zealand holders of foreign patents to consider using their local courts to enforce international rights. Having received a favourable judgement, however, the next challenge for the plaintiff will be to enforce the High Court’s damages order against the Californian infringer.

BACKGROUND – THE FIRST DECISION

The patent in question is US 7,204,172, entitled ‘Stopper removing tool’, held in the name of the New Zealand inventor Bryce Leslie Stewart. The invention disclosed and claimed in the US patent is a bottle opener for sparkling wine, which removes the cork, the foil, and the restraining wire cage, all in a single action.

In a decision earlier this year (Stewart v Franmara Inc[2012] NZHC 683) the same judge had found that California-based company Franmara Inc had breached a confidentiality agreement with Stewart, and had infringed his equivalent New Zealand patent no. 528539. For those breaches, the court had awarded damages of US$864,500 (plus interest), based on a reasonable royalty from 23 September 2005 to 26 March 2012, calculated at the rate of US$133,000 per annum.

In this earlier decision, it appears that the court awarded damages based on all sales of the infringing bottle openers by Franmara, even though they were manufactured outside of New Zealand and the US, and subsequently imported into the US for sale. The Franmara openers could be purchased globally via its web site, although it seems likely that the vast majority of sales would have occurred within the US.

We find this original damages calculation a little unusual. As far as the New Zealand patent is concerned, clearly it could only be infringed by sales of the bottle openers in New Zealand. There does not appear to have been evidence presented to show that such sales were significant.

Breach of the confidentiality agreement could, of course, transcend national borders. However, it appears that the primary reason for the confidentiality agreement in the first instance was to protect against a possible disclosure that would have been prejudicial to a subsequent patent application by Stewart. Once a patent application had been filed this rationale no longer applied. Even more to the point, once a patent application had been published the design of the bottle opener was no longer confidential. Normally, this fact would discharge Franmara of its obligation of confidentiality, even if there were no express provision to this effect in the agreement.

While early possession of Stewart’s confidential information may have been of initial assistance to Franmara, once the relevant information became publicly available its ability to copy the bottle opener design, and thus to cause damage to Stewart, could no longer be wholly attributed to the breach of confidence. Once again, this is something that Franmara might well have argued, and presented evidence on, had it appeared before the High Court.

JURISDICTION OVER US INFRINGEMENT CLAIMS

In the original decision, Justice Toogood had expressed some doubt as to whether the court had jurisdiction to decide the matter of infringement of the US patent, as well as an additional cause of action under the Business and Professions Code of the State of California. He therefore granted leave for Stewart to file further submissions on the question of jurisdiction. Submissions were made only in respect of the patent infringement issue.

In determining that a New Zealand court may have jurisdiction to rule on patent infringement in another country, Justice Toogood was particularly influenced by the decision of the UK Supreme Court in Lucasfilm Limited & Ors v Ainsworth & Anor [2011] UKSC 39.

For laypersons, the main interest of the Lucasfilm case is that it involved the alleged infringement of copyright in Star Wars stormtrooper helmets, which were ‘genuine’ replicas, in the sense that they were manufactured using original tooling by one of the film’s British model-makers. In the US, the helmet designs were protected by copyright, and a US court had found that this was owned by Lucasfilm and that sales of the replicas in the US infringed the copyright, and awarded damages of US$20 million.

Lucasfilm went to the UK courts seeking a further finding of infringement for UK sales of the replicas, along with an order to enforce the $20 million US damages judgment.

On the first issue, Lucasfilm was unsuccessful. The UK courts found that the helmets were not artistic works protected by copyright, but industrial designs protected by design rights which had expired. Lucasfilm also lost the jurisdiction issue in the High Court and the Court of Appeal. However, the Supreme Court ruled that there was no longer any legal or policy justification for refusing to enforce foreign copyrights.

Justice Toogood noted ‘an emerging trend towards the international enforcement of intellectual property rights, especially in cases where the validity of those rights is not challenged’ (at [14]), finding with regard to the Lucasfilm decision (at [18]) that:

I am persuaded, for two reasons, that the New Zealand courts should have jurisdiction to determine the plaintiff’s third cause of action [i.e. the US patent infringement claim]. First, I am influenced by the aforementioned trend towards the international enforcement of these types of rights, as demonstrated by the cases cited above. Second, I note that no issue of validity of the American patent is raised in the present case. Had the defendant taken some steps in the proceeding and raised the issue of validity of the American patent, there may have been an arguable case for this Court declining jurisdiction in favour of a court in the granting jurisdiction. That is not the case, however; the defendant has taken no step so no issue of forum non conveniensarises. I am prepared to assume, in the absence of opposition from the defendant, that this Court has the jurisdiction to determine the plaintiff’s third cause of action.

US PATENT INFRINGEMENT

Justice Toogood determined (at [19]) that ‘[t]he evidence satisfies me that the American patent was validly granted and is in force, and that it has been breached by the plaintiff.’ That evidence was, of course, entirely one-sided, and naturally the plaintiff would not have drawn the judge’s attention to any reasons why he should decline to rule on the US infringement question.

However, as we noted in the opening paragraphs above, there are many reasons why a non-US court might determine that it is not competent to decide issues of US patent infringement, and thus decline to exercise any jurisdiction that it might have. There is almost no common heritage between New Zealand and US patent law. Under New Zealand law (which, like the Australian patent law, is derived from English law prior to the ‘Europeanised’ Patents Act 1977) there is no doctrine of equivalents, and no prosecution history estoppel. Reference to the Patent Office records of examination, or to any prior statements of the applicant or inventor, for the purpose of interpreting the patent claims is impermissible in New Zealand, although it might prove decisive in the US.

However, the defendant Franmara only has itself to blame for not appearing to raise any of these issues.

DAMAGES

Since the court had already awarded full damages based on a reasonably royalty on all sales by Franmara, there was no further amount that could be awarded as a result of the infringement of the US patent additional to the breaches of the confidentiality agreement and/or the New Zealand patent (at [21]).

However, Stewart argued that he was entitled to multiplied damages for Franmara’s wilful infringement, which are available in the US under 35 USC § 284. Justice Toogood disagreed (at [23]):

However, the measure or quantification of damages is generally regarded as a question of procedure governed by the law of the forum (lex fori) rather than the lex causae. It is, therefore, New Zealand law which should govern the quantification of damages. In those circumstances, the increase in damages sought by the plaintiff not being a recognised remedy in New Zealand, I am unable to grant the increased damages sought.

CONCLUSION

The two judgments of the New Zealand High Court in the matter of Stewart v Franmara are highly favourable to the New Zealand plaintiff. There appear to be good reasons to question the extent of damages awarded in relation to the breach of confidence and New Zealand patent infringement, as well as the competence (if not the jurisdiction) of a New Zealand court to decide questions of US patent infringement.

However, these decisions need to be viewed in the context of the fact that the defendant did not appear, and therefore no submissions unfavourable to the plaintiff were put to the court!

The bigger issue for Stewart will be whether he can enforce the New Zealand court’s damages award of US$864,500 (plus interest) against the California-based Franmara. Since a polite request is unlikely to extract this kind of money from a company which did not bother to appear in New Zealand to defend the suit, Stewart will most likely need to apply to a US court to enforce the New Zealand court’s order. Should he do so, this is one battle that Franmara may well decide to fight, being on its own home turf this time. Legal bills in the US could quickly eat into the damages award before any money can be collected, proving that sometimes even when you win, you lose!